Page 229 - DCOM302_MANAGEMENT_ACCOUNTING

Management Accounting

Notes in rupees can be found by dividing the fixed cost with the contribution margin. This will
be ` 50,000/0.4 = ` 1,25,000.
Understanding the BEP concept enables one to take a number of strategic decisions.
The following is an illustrative list of the uses of CVP and BEP analyses:
Deciding on a level of sales to achieve a targeted profi t: At the BEP of sales, there is

neither profit nor loss. It means that the contribution (sales minus variable expenses)

has just about covered the fixed expenses. This suggests that for sales beyond this

point, the entire contribution will be profits because there is no more fi xed expenses
to meet. So, if a profit of, say, ` 1,00,000 is targeted in the illustration, all that is to be

done is to sell additional un its that will make the incremental contribution beyond
meeting the fixed expenses as ` 1,00,000.

In other words, the new volume is targeted to cover not only the fi xed expenses of
` 50,000, but also the profi t of ` 1,00,000. So, dividing ` 1,50,000 by the contribution
per unit of ` 4 gives us 37,500 units. Thus, 37,500 units will have to be manufactured
to achieve a profi t of ` 1,00,000.
The number of units to be manufactured to achieve target profit = target profi t plus

fixed expenses divided by contribution per unit.

Determining the profit at a targeted level of sales: Similarly, if the management has
targeted a level of sales on the basis of its market survey or otherwise, the profi ts
that will emerge from that level of sales can be determined using CVP analysis. The
contribution margin per unit multiplied by the number of units produced over and
above the BEP gives us this figure. Of course, profits can always be computed as

the difference between sales and total cost. But what CVP analysis achieves is that

incremental profits from selling additional units can be easily calculated on the basis
of the established relationship between cost and volume.
Determining the impact of additional fi xed costs: If the fixed costs go up, the revised

BEP can be computed. A no-profit, no-loss situation comes up only at the increased

point now, consequent to the increased fixed costs. The entire structure of relationship
between cost and volume will undergo a change consequent to this increase in fi xed
cost.

In real life, it may be difficult to segregate cost strictly into its fixed and variable
elements. What can be attempted is to bring about as close a split as possible. The

advantages of CVP analysis would far outweigh whatever difficulties one might face
in segregation.
Source: thehindubusinessline.com

Self Assessment

Fill in the blanks:

6. Profit depends upon a large number of factors, the most important of which are the costs
of the manufacturer and the ……………… effected.

7. The Cost-Volume-Profit (CVP) analysis helps management in finding out the relationship

of ……………… to profi t.

8. Cost-volume-profit analysis furnishes a picture of the ……………… at various levels of
activity.
9. The ratio or percentage of contribution margin to sales is known as ………………

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